Bank of England's MPC members Martin Weale and Ian McCafferty drop call for interest rate rise

Weale and McCafferty have previously been worried over rising wage inflation and said their decision was 'finely balanced'

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The Independent Online

Fears over persistent low inflation forced the Bank of England’s two "hawks" to drop their calls for an interest-rate rise in a stunning U-turn, it has emerged.

The change of heart from monetary policy committee members Martin Weale and Ian McCafferty — who have been voting for a rate rise since August — came after the Bank’s official Consumer Prices Index inflation benchmark slipped to an almost 15-year low of just 0.5 per cent in December.

The Bank believes there is a "roughly even" chance the CPI will turn negative in the first half of 2015 as tumbling oil and food prices play havoc with the MPC’s forecasts, minutes of the committee’s January meeting showed.

Just two months ago, the Bank forecast the CPI at 1 per cent in the first three months of the year.

Weale and McCafferty have previously been worried over rising wage inflation and said their decision was "finely balanced".

They insist the plunge in inflation is temporary but added: "They noted the risk that low inflation might persist for longer than the temporary factors implied and concluded that this risk would be increased by an increase in Bank Rate at the present juncture."

The pound sank instantly against the dollar, sliding 0.7c to $1.5094 as traders bet that a first interest rate rise from the MPC since 2007 was now an even more distant prospect.

Financial markets are not fully pricing in a rise until well into 2016.

Berenberg chief economist Rob Wood said Weale and McCafferty had made a "grudging surrender".

"They still think the economy is improving and the jobs market is picking up but they don’t want to give the wrong impression, that they’re not worried about low inflation, by pushing for a rate rise," he said.

With the eurozone already slipping into outright deflation in December, the minutes expressed concern over lingering low prices.

The minutes warned: "It was possible that the fall in near-term inflation might become more persistent if it lowered inflation expectations, pay and other cost growth in a way that became self-perpetuating."

Official figures today showed wage growth averaging 1.8 per cent, excluding bonuses, in the three months to November — a two-year high and more than three times higher than inflation.

But the Bank is also concerned that the period of low — and possibly negative — inflation coincides with the majority of pay settlements.

"It was therefore possible that the pace of nominal wage growth would be weaker than otherwise and that this would feed into lower subsequent price inflation."

Chris Williamson, chief economist at financial data firm Markit, said jobs figures contained "some warning lights to justify caution over rate hikes".

The economy saw the creation of another 37,000 jobs in the quarter to November — the smallest rise since the three months to May 2013.